Foreign investments and tourism are increasing, but adoption is lagging: an analysis of the first nation to adopt the cryptocurrency as legal tender.
September 7, 2024 marks the third anniversary of the law coming into effect that made Bitcoin legal tender in El Salvador. This move made the Central American country the first in the world to officially adopt the cryptocurrency as a national currency alongside the US dollar.
The path to adoption
On June 9, 2021, the Legislative Assembly of El Salvador approved the bill that would make Bitcoin legal tender with 62 votes in favor out of 84 total. The announcement was made by President Nayib Bukele on Twitter.
The law, known as the Ley Bitcoin, then came into effect on September 7, 2021. However, as the president immediately clarified, the use of Bitcoin was defined as optional and no one was obliged to accept it.
The motivations behind the choice
The Salvadoran government indicated several reasons for adopting Bitcoin as legal tender:
- Financial inclusion: before the introduction of Bitcoin, about 70% of the Salvadoran population did not have access to a bank account. This significantly limited the possibilities of access to loans, savings, and other basic financial services. The adoption of Bitcoin aimed to provide broader access to financial services, as it is a system that does not require permission from third parties.
- Reduction of remittance costs: according to the World Bank, in 2020 remittances from Salvadoran emigrants constituted 23.8% of the country’s GDP. The high fees on international transactions represent a significant cost for Salvadoran families who depend on money sent by relatives abroad. The use of Bitcoin, it was thought, could reduce the fees charged by money transfer companies. However, as reported in a paper by the National Bureau of Economic Research of the United States, in 2023 89% of Salvadorans stated that they do not use Chivo to receive remittances from abroad.
- 3. Monetary independence: El Salvador’s economy is primarily based on the United States dollar. This dependence makes El Salvador vulnerable to American monetary policy decisions. Periods of high inflation in the United States lead to increased costs for El Salvador when importing from the U.S. The adoption of Bitcoin aimed to reduce reliance on the monetary policies of the Federal Reserve.
- 4. Attraction of foreign investments: the government hoped that the adoption of Bitcoin would change the country’s image, aiming to attract investors and tourists interested in visiting and spending Bitcoin in the country.
Challenges and criticism
Despite the initial enthusiasm following the approval of the law, the adoption of Bitcoin in El Salvador has faced several obstacles over time:
- Technical issues: alongside the Ley Bitcoin, an official state wallet called Chivo was launched in 2021. Initially, to incentivize adoption, users who downloaded the wallet received a bonus of $30 in bitcoin. However, the launch of Chivo was marked by technical problems and usability difficulties that complicated the adoption of Bitcoin. Due to these issues, 20% of Salvadorans who initially downloaded Chivo did not even use the $30 bonus. According to the National Bureau of Economic Research in the United States, 61% of those who signed up stopped using Chivo immediately after receiving the bonus.
Since the wallet also allows for the exchange of dollars, some Salvadorans today use Chivo as a sort of PayPal. According to the Financial Times, one of the largest banks in the country reported that during the first week of using Chivo, less than 0.0001% of transactions involved BTC.
In addition to the wallet launch, several Bitcoin ATMs have been installed in the country to facilitate the conversion between bitcoin and dollars. Here too, there have been technical problems, such as a lack of dollars in the ATMs. - Internal opposition: some surveys have shown that a significant portion of the population was opposed to or skeptical about the adoption of Bitcoin. In particular, the Instituto Universitario de Opinión Pública of El Salvador conducted a local survey just before the introduction of the Ley Bitcoin.
The results were as follows:
– 70% of the population was opposed or strongly opposed to the approval of the Ley Bitcoin, believing it should never have been approved.
– 20.6% of respondents did not even know what Bitcoin was.
– Only 4.8% could correctly define Bitcoin as a cryptocurrency. - International criticism: institutions such as the International Monetary Fund and the World Bank have expressed concerns about the risks associated with adopting Bitcoin as legal tender. In January 2022, the IMF sent a warning to El Salvador, asking for the removal of the Bitcoin law, believing it could compromise the financial stability and integrity of the country. The IMF also threatened to withdraw a previously promised loan of $1.4 billion.
Non-governmental initiatives: Mi Primer Bitcoin
Alongside government initiatives, independent projects aimed at promoting education about Bitcoin have emerged. One of the most notable is Mi Primer Bitcoin, a non-profit organization founded in El Salvador.
Mi Primer Bitcoin has focused on basic education about Bitcoin, having already trained over 35,000 students in the country, with the goal of reaching 100,000. The organization has developed educational programs such as the Bitcoin Diploma, a 10-week course, and has created open-source resources for teachers.
In 2023, the Ministry of Education of El Salvador began using Mi Primer Bitcoin materials as a primary source for its educational program on Bitcoin. This has led to the training of over 700 teachers and the introduction of Bitcoin education in schools across the country.
Impact after three years
Three years after the introduction of the Ley Bitcoin, let’s analyze the impact in the country:
- Limited adoption: President Bukele himself admitted that the adoption of Bitcoin has not reached the hoped-for levels, emphasizing that many people and businesses prefer to continue using the US dollar. According to the Chamber of Commerce of El Salvador, only 14% of businesses began accepting Bitcoin as a form of payment between September 2021 and July 2022. A survey conducted by the Universidad Centroamericana José Simeón Cañas reveals a decline in the use of Bitcoin. According to the study, only 12% of Salvadorans used Bitcoin to purchase products or services in 2023, compared to 24.4% recorded in 2022.
In a recent interview with Time Magazine, Bukele stated:
“Bitcoin has not had the widespread adoption we hoped for. Many Salvadorans use it; most of the large companies in the country accept it. You can go to a McDonald’s, a supermarket, or a hotel and pay with bitcoin. But it has not had the adoption we expected.” - Tourism and investments: in recent years, El Salvador has seen an increase in tourism and foreign investments, although this increase may not be solely attributed to the adoption of Bitcoin. According to the World Tourism Organization, in the first quarter of 2024, El Salvador ranked fourth among countries with the highest tourism growth (+90%) compared to 2019. Last year, 3.4 million visitors were recorded, reaching a historic high in tourist arrivals, with a 30% increase compared to 2022.
Regarding foreign investments, as of August 2024, El Salvador secured an investment of $1.6 billion from the Turkish company Yilport Holding, aimed at modernizing the port infrastructure of Acajutla and constructing a new port in the city of La Unión, where the Bitcoin City announced in 2021 is planned, though it remains in its embryonic stage, to put it mildly. This is the largest private investment in the country’s history. - Bitcoin in the National Treasury: starting from November 18, 2022, El Salvador decided to begin purchasing 1 bitcoin per day to include the asset in state reserves. Currently, the country holds a total of 5,864.76 BTC, equivalent to approximately $330 million. At this time, the national treasury is in profit of about 30%, equivalent to nearly $35 million, according to the website nayibtracker.com.
- Financial education: initiatives like Mi Primer Bitcoin have contributed to improving financial literacy and knowledge of Bitcoin among the population. The government has drawn inspiration from these initiatives to launch a study program in all schools in the country and to educate 80,000 public employees within the government.
Three years after the decision to adopt Bitcoin as legal tender, El Salvador remains a unique case study in the global landscape. While adoption remains challenging, the country has made progress in education and attracting foreign investments and tourism.
